Tax gap program summary findings

2021–22 overall tax gap

2021–22 is the most recent financial year with all tax gap estimates produced.

Our estimate for the overall tax gap for 2021–22 is $44.5 billion against our estimate of the total amount that we would collect if everyone was fully compliant, $590.3 billion. This represents a net tax gap estimate of 7.5%.

Figure 6 shows the overall tax gap. The largest contributors (in dollar value) to the overall tax gap remain the same as last year.

Figure 6: Estimated total tax gap for 2021–22

Figure 6: Chart showing overall tax gap of $44.5b (or 7.5%) comprising:
• small business $17.7b
• individuals not in business $10.6b, goods and services tax 4.4b
• large corporate groups $3.6b, excise $3.3b
• high wealth and medium business $2.6b
• other tax gaps $2.3b.

Personal income tax gap

The personal income tax gap consolidates all the income tax gaps relating to individual tax returns.

It includes the income tax gaps for:

Overall, the trend in our estimate of the personal income tax gap is steady over the 6 years from 2016–17 to 2021–22, with the main contributor being individuals not-in-business.

Figure 7: Personal income tax gap trend

Figure 7: Chart showing the six-year trend for the personal income tax gap peaking at 9.6% in 2018–19 and decreasing to 8.5% in 2021–22.

Corporate income tax gap

The corporate income tax gap consolidates all the income tax gaps relating to corporate tax returns.

It includes the income tax gaps for:

high wealth income tax gap
large corporate groups income tax gap
small business income tax gap
medium business income tax gap.

The overall corporate income tax gap estimate is now trending upwards, with an increase in both the gross and net tax gap in each of the past two years. Most of this increase is from the small companies component of the small business income tax gap population and large corporate groups.

Figure 8: Corporate income tax gap trend

Figure 8: Chart showing the six-year trend for the corporate income tax gap remaining relatively stead between 2016-17 and 2019–20, averaging 5.5%, but increasing slightly to 6.0% and 6.3%, in 2020-21 and 2021-22, respectively.

Goods and services tax gap

The latest estimates for GST indicate a sharp increase in the estimated net gap to $7.9 billion in 2022–23 (9.0% of theoretical GST) up from $4.4 billion (5.5%) in 2021–22. The increase in the net gap reflects stronger growth in GST liabilities (11.8%) than in tax expected to be paid (7.8%). All the main components of the GST base grew, and the consumer spending component was boosted by a re-direction of spending towards GST-able expenditures. The weaker growth in tax expected to be paid partly reflects the relatively large estimates of non-pursuable debt for both years which includes the ongoing impacts of COVID-19 and Operation Protego.

Figure 9: Goods and services tax gap trend

Figure 9: Chart showing shows the six-year trend for the goods and services tax gap falling from 7.3% in 2016–17 to 4.3% in 2020–21, then increasing to 5.5% and 9.0%, in 2021-22 and 2022-23, respectively

Excise and other taxes gap

The remaining 9 tax gap estimates are excise taxes and several smaller transactional and income-based taxes. While we see an increase in the tax gap related to excise and other gaps, the increase in 2021–22 is largely attributed the tobacco duty gap. Significant amounts of illicit tobacco continue try to be smuggled through the border. In 2021–22, illicit tobacco supply is estimated to have contributed about $2.3 billion to the overall gap amount.

Figure 10: Excise and other taxes gap trend

Figure 10: Chart showing the six-year trend for the excise and other tax gaps overall increasing from 6.8% in 2016–17 to 8.1% in 2021–22.

Shadow economy findings

The shadow economy refers to people who intentionally operate entirely outside the tax and regulatory system or who are known to the authorities but do not correctly report their tax obligations.

Participation in the shadow economy penalises compliant taxpayers, undermines the integrity of Australia's tax and welfare systems and creates an uneven playing field for the majority of small businesses doing the right thing.

If left unchecked, shadow economy participation can lead to a dangerous dynamic. It can foster a culture which legitimises and supports this participation, spurring its further growth. As revenues fall, those remaining in the formal economy may be faced with higher tax burdens, providing a greater incentive to move into the shadows. All other OECD countries are grappling with the shadow economy issue – Australia is not alone.

While the shadow economy is not limited to tax and super, this is our main focus in tax gap contexts. The tax effect of shadow economy activities is a component of the tax gap which is measured against full compliance with relevant tax arrangements. For tax gap purposes, we focus only on the resultant tax effect – that is the tax revenue lost due to these activities.

In the past, there have been various estimates of the economic impact and size of the shadow economy in Australia including an Australian Bureau of Statistics (ABS) information paper released in 2013 and the Black Economy Taskforce in 2017. Our estimates of the tax effect of the shadow economy are mainly based on internal analysis in the context of each tax type however, for the GST gap, the indicative shadow economy estimates applied are leveraged to both the ABS and Black Economy Taskforce estimates.

The key findings from our gap analysis related to shadow economy activities are summarised below.

For alcohol and tobacco excises, GST, and fuel tax credits we have estimated and published shadow economy and gap estimates for 2022–23, reflecting the availability of more contemporaneous data.

System-wide aggregates

Our latest tax gap estimates indicate that around $22.0 billion of tax was lost in 2021–22 due to shadow economy activities associated with transaction-based and income-based taxes. This represents a relatively modest increase over our updated estimate for 2020–21 of $20.8 billion. The estimated tax lost due to shadow economy activities in 2021–22 represented around 38% of the aggregate gross gap; down from around 41% in 2020–21.

As a share of theoretical tax revenue for these taxes, shadow economy tax lost has fallen from 5.4% in 2020–21 to 5.3% in 2021–22. This is the first year that the shadow economy aggregate has fallen as a share of theoretical tax since 2016–17. Table 6 provides more detail.

Shadow economy effects associated with administered programs are not included in these system-wide aggregates.

Table 6: Shadow economy tax effects of total program
Tax gap program	2016–17	2017–18	2018–19	2019–20	2020–21	2021–22
Transaction-based ($m)	2,790	3,208	3,720	4,063	6,077	7,471
Income-based ($m)	9,295	9,709	12,199	13,036	14,681	14,575
Total of transaction and income-based taxes ($)	12,085	12,917	15,918	17,099	20,758	22,046
Total theoretical tax liabilities ($m)	316,744	338,727	349,726	359,330	381,903	417,966
Proportion of total theoretical tax liabilities %	3.8	3.8	4.6	4.8	5.4	5.3

The evolution of estimated tax effects of shadow economy activities for transaction and income-based taxes is shown in Figure 11.

Figure 1 1: Shadow economy tax effects and theoretical tax, $billion and % of theoretical tax.

Figure 11: Chart showing the six-year trend for the overall tax effects of the shadow economy and theoretical tax. The tax effects of the shadow economy increased from $12.1 billion in 2016–17 to $22.0 billion in 2021–22. As a share of theoretical tax, the shadow economy rose from 3.8% in 2016–17 to 5.3% in 2021–22.

Transaction-based taxes

Transaction-based taxes relate to taxes that are paid when you buy, sell, manufacture, produce, store, or import certain goods or services.

Alcohol excise gap – all illicit activity is regarded as shadow economy behaviour and is the major contributor to the overall gross gap in recent years. The tax effects of shadow economy activities have increased from $615 million (88.5% of the gross gap) in 2020–21 to around $660 million (88.4%) in 2021–22, and further to $709 million (88.6%) in 2022–23. Recent outcomes reflect the decline in international passenger volumes associated with the COVID-19 pandemic which has reduced the contribution to the gap from small scale illicit activity. Large scale illicit activity continues to trend higher.

Tobacco excise gap – reflects tobacco grown illegally within Australia and illegally imported tobacco on which duty hasn't been paid. Reflecting this, the shadow economy tax effects represent 100% of the gross gap in all years. The tax effects of the shadow economy have increased from around $2.1 billion in 2019–20 to around $5.2 billion in 2021–22 and further to $6.3 billion in 2022–23. The amount of illicit tobacco attempted to be smuggled across the borders has increased sharply in recent years and has been the critical driver of higher gross gap estimates for tobacco.

GST gap – previous estimates relied on data published by the ABS which, despite the uncertainty flowing from the disparate effects associated with the COVID-19 pandemic, likely underestimated the size of the shadow economy. Reflecting this uncertainty and the higher estimates published by the Black Economy Taskforce in 2017, we now consider it prudent to reflect a more contemporary view of the shadow economy into the GST gap. The purpose of this updated adjustment isn't to provide precise estimates of the shadow economy as it relates to the GST but to move towards estimates that are likely to be more accurate. This re-alignment has added over $1 billion to the estimated GST foregone due to shadow economy activities in recent years. The shadow economy is estimated to have resulted in foregone GST revenues of around $1.5 billion in 2020–21 (23.9% of the gross gap) before rising to around $1.6 billion (14.9%) in 2021–22, and further to around $1.9 billion (16.5%) in 2022–23.

Table 7: Shadow economy tax effects of transaction-based taxes
Transaction-based program	Shadow economy estimation	2016–17	2017–18	2018–19	2019–20	2020–21	2021–22	2022–23
Alcohol excise ($m)	Illicit channels only	402	420	448	490	615	660	709
Tobacco excise ($m)	All channels	980	1,310	1,744	2,118	3,991	5,203	6,278
GST ($m)	Based on internal estimates	1,409	1,478	1,527	1,455	1,471	1,607	1,854
Total transaction-based tax effect ($m)	Based on varying internal estimates	2,790	3,208	3,720	4,063	6,077	7,471	8,841
Proportion of theoretical tax liability of transaction taxes above (%)	n/a	3.3	3.6	4.1	4.5	6.2	7.1	7.6

Income-based taxes

Income-based taxes relate to taxes based on income from various sources.

Small business income tax gap – shadow economy activities for small business mainly relate to under-reported business income, over-claimed business deductions and hidden wages for associated individuals. Overall, the tax effects due to shadow economy activities in the small business sector fell from around $11.4 billion (60.8% of the gross gap) in 2020–21 to $11.2 billion (59.4%) in 2021–22.

Individuals not in business – shadow economy activities relate to hidden wages and to people who intentionally stay outside the tax system. The tax effects of both these activities grew modestly from $3.3 billion in 2020–21 to $3.4 billion in 2021–22 resulting in a small fall in the shadow economy contribution to the gross gap from 30.0% in 2020–21 to 29.8% in 2021–22.

Table 8: Shadow economy tax effects of income-based taxes
Income-based program	Shadow economy estimation	2016–17	2017–18	2018–19	2019–20	2020–21	2021–22
Small business ($m)	Estimated using sample	6,528	6,777	9,069	9,824	11,416	11,150
Individuals not in business ($m)	Estimated using sample	2,767	2,932	3,130	3,212	3,265	3,425
Total income-based tax effect ($m)	Estimated using sample	9,295	9,709	12,199	13,036	14,681	14,575
Proportion of theoretical tax liability of income-based taxes above (%)	n/a	4.0	3.9	4.7	4.8	5.2	4.7

Administered programs and PAYGW

The ATO administers a range of payments and transfers on behalf of the Australian Government, including incentives and rebates delivered through the tax and super systems. Shadow economy effects associated with administered programs are not included in the system-wide aggregates discussed below.

Superannuation Guarantee – hidden wages are the only source of shadow economy activity recognised in this gap. The shadow economy estimate for Superannuation Guarantee is around $2.17 billion for 2021–22 (representing around 35.2% of the estimated gross gap) compared with around $2.03 billion (36.0%) in 2020–21.

Pay-as-you-go withholding – hidden wages are the only type of shadow economy activity included for this category. As the PAYG withholding gap and income tax gaps are estimated separately, missing income tax that should have been withheld by employers is captured in both gap estimates. To avoid double counting, we capture the tax effect of shadow economy only once across the PAYG withholding and income tax gaps. As a result, some of the tax impact of hidden wages estimated for the PAYG withholding gap is said to have been 'passed-through' to be reflected in income tax gaps (see Table 8). After accounting for this pass-through, the residual total shadow economy estimate for PAYG withholding is around $583 million for 2021–22 (representing around 9.2% of the estimated gross gap) down from around $611 million (10.2%) in 2020–21.

Fuel tax credits – were previously considered free of shadow economy activities however there was an increase in the number of relatively low value fraudulent claims in the Fuel tax credits system through 2020–21. We now consider these to be part of the shadow economy and estimate their tax effect at around $91 million (26.9% of the estimated gross gap) for 2021–22 falling to $16 million (4.6%) in 2022–23.

Table 9: Shadow economy tax effects of administered programs and PAYGW
Administered program	Shadow economy estimation	2016–17	2017–18	2018–19	2019–20	2020–21	2021–22	2022–23
Superannuation guarantee ($m)	Hidden wages based on 2.3% uplift	1,705	1,797	1,890	1,953	2,027	2,170	n/a
PAYG withholding ($m) (See Note)	Hidden wages based on 2.3% uplift	661	619	606	558	611	583	n/a
Fuel tax credits ($m)	Fraudulent claims	0	0	0	0	0	91	16
Total administered programs ($m)	Total of SG hidden wages, PAYG withholding hidden wages and Fuel tax credits fraudulent claims.	2,366	2,416	2,496	2,512	2,638	2,844	n/a
Proportion of theoretical liability (%)	n/a	1.0	0.9	0.9	0.9	0.9	0.9	n/a

Note: This is the residual shadow economy amount in PAYGW after the pass-through income tax effects have been captured by individuals and small business tax gaps.